Inpatient Prospective Payment System Final Rule for 2025

The Inpatient Prospective Payment System (IPPS) Final Rule for 2025 introduces significant updates that will shape how hospitals receive Medicare payments for inpatient services. On August 1, 2024, the Centers for Medicare & Medicaid Services (CMS) announced the final rule for the FY 2025 Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital Prospective Payment System (LTCH PPS). Provisions of the final rule are normally effective on October 1, 2024. The rule will raise Medicare IPPS rates by a net 2.9 percent in FY 2025 compared to FY 2024 for hospitals that adopt electronic health records (EHR) and submit quality measure data. CMS approved a $3.2 billion increase in hospital payments, a $200 million reduction in disproportionate share hospital (DSH) payments, and a $300 million increase in new medical technology payments.

One of the most notable aspects of the Hospital IPPS Final Rule 2025 is the change in standardized payment rates. CMS has proposed raising base payment rates for hospitals that achieve the reporting and quality standards established by the Hospital Inpatient Quality Reporting (IQR) Program. This adjustment reflects inflationary pressures and tries to help hospitals deal with increased operational costs. At the same time, hospitals that fail to fulfill these standards may experience a decrease in their payment updates, stressing the importance of quality performance in obtaining full reimbursement. The 2025 IPPS rule also emphasizes reducing healthcare inequities.

Another significant aspect of the Final Rule is the extension of the New Technology Add-On Payments (NTAPs) program. CMS has identified certain breakthrough medical technology and treatments eligible for higher payments in 2025, ensuring that hospitals are able to implement cutting-edge medicines. This project promotes innovation in patient care, especially for situations that necessitate advanced treatment choices, such as uncommon diseases and difficult surgeries.

Key Takeaways from the FY 2025 IPPS Final Update

CMS finalized an increase of 2.9% in operating payment rates for general acute care hospitals paid under the IPPS that successfully participate in the Hospital Inpatient Quality Reporting (IQR) Program and are meaningful electronic health record (EHR) users. This increase is based on a projected FY 2025 hospital market basket percentage increase of 3.4%, reduced by a 0.5 percentage point productivity adjustment.

CMS finalized a mandatory episode-based payment model called TEAM. TEAM will require acute care hospitals in specific geographic regions to be accountable for the cost of care for Medicare beneficiaries during and after certain surgical procedures:

• Lower extremity joint replacement
• Surgical hip/femur fracture treatment
• Spinal fusion
• Coronary artery bypass graft
• Major bowel procedures
• CMS finalized as proposed that this mandatory model will begin on January 1, 2026.

To help mitigate future drug shortages, CMS finalized its proposal to establish a separate payment to support small, independent hospitals in establishing and maintaining a buffer stock of essential medicines.

CMS updated its labor market configurations using more current census data. This change will reshuffle hospital geographic assignments and affect the wage index for most hospitals. It also could affect hospital eligibility for geography-specific programs, such as Medicare-dependent hospital (MDH) status. CMS finalized its proposal to continue its low-wage index hospital policy.

CMS finalized, as proposed,d three policy changes for new technology add-on payment (NTAP) applications for FYs 2025 and beyond.

In the 2021 IPPS final rule, CMS finalized a proposal to evaluate existing Medicare Severity Diagnosis-Related Groups (MS-DRGs) with a three-way severity level split to ensure that the base MS-DRG contains a meaningful volume of cases and satisfies other set criteria. CMS will continue to delay implementing these criteria to existing MS-DRGs for another year.

CMS finalized its proposed nine guiding principles to be used to determine which secondary diagnosis codes can trigger a complication or comorbidity (CC) or major complication or comorbidity (MCC) and finalized its proposal to add seven diagnoses describing housing instability as CCs.

For the Hospital IQR Program, CMS adopted seven new quality measures, removed five existing quality measures, and modified two current quality measures. CMS finalized policies to govern the distribution, by January 31, 2026, of an additional 200 Medicare-funded residency positions to train physicians.

Because Congress temporarily extended the low-volume hospital payment adjustment and MDH programs through the end of the calendar year (CY), CMS finalized policies for these hospitals for the portion of the FY that falls within that window (October 1, 2024, through December 31, 2024) and the remainder of the FY, beginning on January 1, 2025.

In FY 2025, the total uncompensated care payment (UCP) is expected to be around $5.7 billion. CMS has finalized its proposal to implement the revised Office of Management and Budget (OMB) labor market region delineations for the FY 2025 wage index. This will affect the computation of Medicare disproportionate share hospital (DSH) payment adjustments for some rural hospitals.

CMS summarised responses to its RFI on Medicare payment for maternal care services, noting that the comments will inform the agency’s future actions to reduce maternal health disparities and improve maternal health outcomes.